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3 Big Takeaways From Zendesk's Fourth Quarter

By Daniel Sparks - Feb 8, 2018 at 6:33PM

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These are the metrics driving Zendesk stock higher.

After reporting its fourth-quarter results this week, customer service platform Zendesk (ZEN -0.32%) impressed investors yet again, adding to its stock's big gains recently. Thanks to their approximately 5% rise on Wednesday in response to the report, shares are now up a whopping 65% in the past 12 months and 20% year to date.

Some of the most important takeaways from Zendesk's report help explain why the stock has been on such a bullish run lately. For its fourth quarter, the company delivered robust revenue growth and solidified its first full year of positive free cash flow. Here's a look at the results.

Zendesk support dashboard metrics

Zendesk support dashboard metrics. Image source: Zendesk.

1. Revenue handily exceeded guidance

Investors were watching Zendesk's revenue growth closely when the company reported its fourth-quarter results. In its third quarter, revenue growth actually accelerated, easily beating the consensus analyst estimate for the top line during the period. Third-quarter revenue was about $113 million, up 40% year over year. 

What was particularly notable about Zendesk's 40% revenue growth in Q3 was that it was a marked acceleration from the already impressive 36% year-over-year growth it posted in its second quarter. 

Going into Zendesk's fourth quarter, both management and analysts expected revenue growth to return to lower levels again. While revenue growth did slow, it wasn't by much. Fourth-quarter revenue grew 39% year over year to $123.4 million -- well above management's guidance for between $118 million and $120 million.

2. Zendesk was free-cash-flow positive in 2017

In its third-quarter shareholder letter, management forecast its free cash flow (measured by net cash from operating activities less purchases of property and equipment and internal-use software development costs) would be positive for the full year, highlighting the company's scalable business model.

Zendesk delivered. Combining its revenue growth and improving profit margins throughout 2017, free cash flow sat at $18.2 million.

This helped contribute to a stronger cash position. Zendesk ended the year with about $109 million of cash and cash equivalents, $138 million in short-term marketable securities, and $97 million in long-term marketable securities.

3. Large customers continued to drive growth

Large customers continue to be a key driver for Zendesk's business, giving credence to the company's strategic goal during 2017 to move upmarket by landing more large deals with mid-market and enterprise companies.

One of the key metrics for gauging its penetration with larger organizations is its percentage of support monthly recurring revenue generated from customers with 100 or more support agents. This penetration rose to 38%, up from 34% in the year-ago quarter and 37% in Q3.

Zendesk employees working at their computers at the company's headquarters

Zendesk office. Image source: Zendesk.

In addition, Zendesk said the number of contracts it signed with an annual value of $50,000 or more was up 25% year over year.

Notably, however, this growth is down meaningfully from the 50% year-over-year growth in these large customers in Q3. In addition, Zendesk also warned for a decrease in the average size of its over-$50,000 transactions compared to the same period last year. Comparatively, the average size of its $50,000-plus transactions in Q3 were up 40% year over year. In light of these trends, growth in large customers could play a smaller role in driving growth in 2018.

Looking ahead, Zendesk expects more strong growth but at a decelerated rate, as well as 2018 revenue to land between $555 million and $565 million, up 29% to 31% year over year. "As we move into 2018, we are focused on further maturing our omnichannel offering and accelerating our push upmarket," it said.

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